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Thursday, January 6, 2011

Chinese Negotiators Play Hardball

By Matthew Robertson

Epoch Times Staff

Chinese official Dong Yan made it clear from the get-go: “The project is to drive China’s economy, not foreign economies.” He was talking about China’s massive investments in high-speed rail technology, and he and his colleagues’ bare-knuckled approach to the negotiations spoke for itself.

Dong Yan is Director of the Institute of Comprehensive Transportation, National Development and Reform Commission. In a candid and detailed account posted to a popular web portal recently, Yan and other Chinese officials openly boast of their adventures in manipulating foreign companies, playing them off against one another, acquiring their technology, and redeploying it elsewhere.

China already has the greatest length of high-speed rail in the world, and the project is not half complete: 7,531 km (about 4,700 miles) of track now exist, with 16,000 km (9,900 miles) planned by 2020. The total investment will reach up to 2 trillion yuan (US$295.1 billion). Communist Party visionaries have blueprints to link together major cities across the country like a board of string art.

Early on they realized the need for foreign technology, after an abortive attempt during the “Eighth Five Year Plan” from 1991-1995. The Chinese-made rails were low-tech, slow, and unstable at high speeds.

Transfer Foreign TechnologyIn 2003 the decision was taken to go with foreign technology for the Beijing-Shanghai high-speed railway, with Dong Yan’s guiding principle, almost Maoist in its pith, that China should be the sole beneficiary of any exchanges with outsiders. In 2006 the proposal became a project after being approved by the State Council Standing Committee.

That’s when Wu Junyong cracked his knuckles and got to work. Wu is a professor at Beijing Jiaotong University and led the initial negotiations. The goal was to use the best technology, have its core parts (and maybe a bit more) transferred to Chinese enterprises, and have 75 percent of the parts made in China.

Siemens found a local partner and jumped in. They made three locomotives, the rest were made in China. Their technology was taken and redeployed elsewhere. “I have no sympathy with Siemens,” says Derek Scissors of Heritage Foundation. “What did you think was going to happen?”

A previous deal with the Japanese company Kawasaki went along the same lines: Kawasaki would transfer its technology and in return be allowed to make, assemble, and ship three trains to China; six were made in Japan and assembled in China; 51 were made in China, with some high-tech imports—though just how many is unknown.

The pattern was the same, as Professor Wu explains in the article: to break down high-speed rail technology and get a piece from each company, so no foreign firm gets much leverage. “After decomposing the technology like this, each foreign firm’s bargaining power is limited,” Wu says.

Backed by the full force of the Chinese Party-state, individual companies were isolated and lost their bargaining power. “Led by Chinese Ministry of Railways, China's administrative power played advantage in the negotiations,” Wu said.

He was clear on China’s advantages. “If we do not give in, the other side cannot do anything. Everyone wants to squeeze into the huge opportunities brought by China's vast high-speed rail plan.

“China’s method is: let’s be united like an iron slab, let the foreign businesses compete with each other, this way we can utilize our negotiation leverage.”

The sentiment recalls the tactics of Communist Party officials negotiating with the United States in the 1950s and 1960s: “conviction of an inevitable victory, the strategy of a military campaign,” writes Kenneth T. Young, a diplomat at the time, in a book on the subject: “Peking-style negotiation aims at... capitulation, not... accommodation.”

‘China Dream’
The promise of a vast, untapped Chinese market has for over a decade filled the dreams of executives of foreign firms. Few have seen the seeds flower. Shrewd Chinese negotiators, on the other hand, have found in their pliant quarry an expeditious way to advance their careers, the Party, and the New China’s rapid push to modernization.

“The selling party thinks that China’s high-speed train plan is so huge, they are willing to reduce prices; what they value is the huge Chinese market,” Wu says.

But that market is not what it appears, according to Derek Scissors, who was a business consultant in China before becoming a Heritage scholar. “To me the China market is largely fictional. Very few have ever tapped the market. It’s there but they just won’t open it to multinationals.”

Wu Junyong says as much. “China has its own strategy,” the article harps, before flipping back to Wu’s narrative: “Let’s start negotiating on the shorter rail line, such as Wuhan-Guangzhou high-speed line, and don’t talk about technologies that we already learned from the seller. When we start building the 1300 kilometer Beijing-Shanghai high-speed line, we already have all the technologies we need.”

The process of acquisition and redeployment, perhaps helped along by measures not stipulated in the contract, is by now well-established. “The Chinese technical staff learn very quickly from outside vendors,” the article says.

What if the foreign firm, who did not foresee that their shiny new traction transformers would end up being rebuilt in Chinese factories and redeployed elsewhere, or even exported, cries foul? Wu has it covered: “We can say that the trains used in the Beijing-Shanghai high-speed line are built with self-owned intellectual property rights.”

Not quite so, according to Scissors, and with him numerous other businessmen and journalists who have seen it happen and recounted the outcome in books and newspaper articles over the last several decades. Because of the draw of the ”China Dream,” “They are thus able to implement a strategy of stealing technology over time. If you were a little country and you tried to steal technology like that, they wouldn’t talk to you again,” Scissors explains.

“This is a broad situation where China does not respect intellectual property rights in general,” Scissors says. “Don’t be surprised or complain when your technology shows up in exports. The Chinese have done this to the Russians and their military aircraft. This is a longstanding and wide ranging pattern... Eventually you point to companies and ask: are you ever going to learn?”

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